The contest between
Aurizon
and the customers of its Queensland railway monopoly has taken a turn for the ugly with a scarifying submission to the state competition regulator by the Queensland Resources Council.

The latest trigger for anxiety is a new set of operational undertakings offered by Aurizon to the regulator.

Known as UT4, the undertakings are the first offered since Aurizon was released from government ownership and their effect, according to QRC, would be to “significantly reduce the constraints on its monopoly power".

In a letter introducing its submission to the Queensland Competition Authority’s chairman,
Malcolm Roberts
, the QRC claims: “Aurizon Network seeks a regulatory model in which it can negotiate access conditions for expansions with access seekers, free of effective regulatory oversight.

“This is not the business which Aurizon’s shareholders purchased, and it is not a model which will promote investment in the Queensland coal industry. A model which relies on negotiations with a monopoly to deliver efficient outcomes is fundamentally flawed."

According to the QRC, should UT4 be adopted, coal producers would be forced to absorb an average tariff rise of 36 per cent while the non-electric charge could increase by 45 per cent.

The QRC submission predicts those charges could be even steeper if freight volumes do not run in line with Aurizon’s baseline estimates. The regulator’s expert says we should expect a 10 per cent shortfall over the life of UT4.

“UT4 is an ambit claim and a disappointing starting point for this process," QCA reports.

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“Coal producers and their suppliers are implementing sweeping efficiency improvements across their businesses in order to remain globally competitive. Aurizon Network stands alone in the industry, seeking to claim substantial cost increases across maintenance, operating costs and corporate costs."

The QCA’s vivid collection of talking points echoes clearly concerns we reported back in July on the back of submissions by
Anglo American
and
Glencore
to a Productivity Commission review of rail access.

Each is a major customer of Aurizon in Queensland and each cited the rail operator’s proposed undertakings as indicative of the problems created by the integrated structure that leaves the freight operator the biggest customer of the monopoly infrastructure vested to the company in its privatisation.

Watershed moment

The 3500-page draft was described by a major customer as a “watershed moment" in the competitiveness of the state’s coal industry.

“Aurizon’s behaviour through the UT4 process has been lamentable and has only served to reinforce our earlier fears," the miner told me in June. “There are three concerns about UT4. First, it attempts to remove ring-fencing provisions aimed at ensuring Aurizon does not preference its own freight business over other operators. Second, it attempts to reset the network’s cost base and thus distort pricing outcomes. And third, it means Aurizon can pick and choose winners in the race to secure its future rail, and maybe port, capacity."

This assessment of the critical importance of UT4 to the coal industry and of resentment at Aurizon’s attempt to extract unearned rent from its network is reflected fully in the QRC’s submission.

“UT4 is a critical document to the future of the coal industry in Queensland," QRC said. “If approved in its current form, it will adversely impact on the future of existing coal mines and provide strong disincentives to further investment in the Queensland coal industry.

“QRC does not consider that draft UT4 is in the public interest, including the public interest in having competition in rail haulage and coal markets, and it is not in the interests of persons who may seek access to the service. The draft UT4 promotes Aurizon Holding’s interests, beyond what would be consistent with Aurizon Network’s legitimate business interests."

Pivotal to the difference of opinion between Aurizon and its customers is the assessment of what is an appropriate rate of economic return for a regulated monopoly service.

Aurizon wants to bake in 8.17 per cent as its weighted average cost of capital. The customers say that is too high given Aurizon Network is an inherently low-risk business.

“This is proposed for a business in which revenues are virtually guaranteed and costs can be adjusted to the point of approaching a pass-through arrangement. Aurizon’s approach to successive undertakings has been to identify and eliminate risks, whether material or otherwise. Aurizon has been extremely successful in this process and this success should be reflected in Aurizon Network’s WACC," QRC argues.

“Access charges should be based on efficient costs and on a WACC which is a genuine reflection of the low risk of Aurizon Network’s business.

The QRC goes on to offer 5.6 per cent as a starting point for the UT4 WACC, a position it supports with an independent expert’s report (in this case prepared by McKenzie & Partington and Castalia).

“It is important that the opportunity to develop such an undertaking is not lost as a result of the extreme starting position taken by Aurizon Network and adherence to a target completion date."

For the record, Aurizon’s UT3 formally expired on June 30 without fulfilling a commitment to establish a user funding model for capacity expansion or finalisation of a promised incentive regime.

Newcrest’s capacity to inflict and endure self-harm leaves it a fair old candidate for recruitment by Johnny Knoxville for a new series of Jackass.

On Thursday the presently ill-starred gold company went to market with a quarterly production report that showed signs of delivery on performance promised.

Sadly, this relatively rare event in its recent history was preceded by confirmation that the company would “voluntarily" surrender $120 million of research and development tax concessions booked between 2009 and 2011.

Between 2005 and 2011 Newcrest banked $235 million of R&D tax breaks. It noted in its recent annual report that those claims were subject to review by the ATO and the independent arbiter of such matters, Innovation Australia. In the wake of a series of recent assessments and one landmark judgement by the Adminstrative Appeals Tribunal, Newcrest has accepted $120 million of its claims do not stack up.

To be very clear, Newcrest says the claims banked in its accounts were the product of internal and external expertise and were based on a standard and conservative appreciation of the 2005 tax law.

Tax, by its nature, is a more retrospective game than other arms of law or commerce. This polar change of certainty is a relatively routine product of detailed interpretation by the ATO and IA, reinforced by subsequent court rulings.

The trigger for Newcrest’s decision to run up the white flag and not actively test the vast majority of its 2009-11 R&D claims was an August 16 AAT ruling on a case bought against Innovation Australia by
Glencore
(nee Xstrata). The case centred on an unquantified set of concessions claimed against expenses incurred in the Mt Owen coalmine construction.

Mr Owen is an unusually deep open-cut coalmine. Its construction, according to Xstrata, was the product of risk, experiment and innovation which allowed it to claim R&D concessions. That claim was rejected in total in 2009 and in majority on review in 2010. So Glencore trooped off to the AAT and lost. So did Newcrest, which will now send a cheque of $70 million to the taxman (the balance is mitigated by existing tax losses.)

The million dollar question is whether any other open-cut diggers have banked R&D concessions that no longer stack up. The answer, from the Minerals Council down, is no one is sure. But it is hard to believe Glencore and Newcrest would be working to a tax playbook that was uniquely theirs.